21. Profitability Ratios LO3 The following financial information about Cloudburs
ID: 2760582 • Letter: 2
Question
21.
Profitability Ratios LO3
The following financial information about Cloudburst Co. is available:
Sales
$600,000
Net income
130,000
Average total assets
900,000
Average stockholders' equity
440,000
The following additional information is available:
•500,000 shares of common stock were outstanding during the year.
•The stock was recently trading for $5.00 per share.
Required
Compute the following ratios: profit margin, return on equity, return on assets, earnings per share, and price to earnings. Round percentages to one decimal point (i.e., 12.8%).
Sales
$600,000
Net income
130,000
Average total assets
900,000
Average stockholders' equity
440,000
Explanation / Answer
Profit Margin Ratio= Net income/ Net sales
=$130,000/$600,000=21.67%
Return on Equity=Net income/ Avg Shareholder’s Equity
=$130,000/440,000=29.55%
Return on Assets= Net income/Avg Total Assets
=$130,000/$900,000=14.44%
Earnings per share=Net income/No of shares outstanding
=$130,000/50,000=2.6
Price to earnings= Market value of stock/ Earnings per share=$5/2.6=1.92
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